Revenues rise as Google says hard times will drive business

The search giant continues to grow revenues while holding costs in check. Its …

Google shrugged off the global economy's current spasms, as its third quarter revenues rose over 30 percent year-over-year. Revenues may be tailing off, as this represented only a four percent quarterly growth, but the company has managed to keep its costs stable, and its executives are voicing a bit of cautious optimism that economic hard times may make many of its services more appealing. The market seems to agree, as the stock picked up $30 a share (nearly 8 percent) in after-hours trading.

Google pulled in roughly $5.5 billion in revenue in Q3, with roughly $4 billion of that coming straight from Google.com properties. Revenue in the US has been roughly flat in the past year, which represented the third quarter in a row that international revenue came in narrowly ahead of domestic dollars. The money drove GAAP income up to $1.35 billion ($4.24 a share), while its non-GAAP numbers hit $1.56 billion, or $4.92 a share.

That money left the company with a wad of cash worth $14.4 billion, with which it was earning annual interest in the range of two-to-three percent on, suggesting it was invested very conservatively. Given the increasing importance of international revenues, Google has rolled out a currency-hedging program that should insulate it somewhat from fluctuations in the currency markets. The roll-out cost about $80 million, but has already started to save the company money. Right now, Google focuses on British pounds, euros, and Canadian dollars, but other currencies will continue to be added to the system.

Google's success appears largely driven by keeping its costs tightly in line. As revenues have grown, Google has managed to keep its Traffic Acquisition Costs—largely payments to its partners—stable for all of fiscal 2008. The net result is that TAC as a percentage of revenue have dropped about 2.5 percent over the last year. Other costs, including R&D, sales and marketing, and administration, have held flat as a percentage of earnings as well. Thus, as long as Google can drive revenue up, profits will follow.

It's hard to avoid talking about the global economic problems these days and, in the earnings conference call, none of the Google executives seemed interested in trying. Google CEO Eric Schmidt introduced the company's new CFO by saying that he had, "joined us in interesting times." While Schmidt acknowledged that there were going to be challenges ahead, he pitched Google as, at a personal and business level, providing solutions to the challenges for others. Individuals would be drawn to Google in order to find better bargains online, while both universities and companies could turn to Google's apps to cut down on their IT costs.

Google is doing its best to make sure that the dollars keep rolling in, though. It doesn't take its lead in the search business for granted; Sergey Brin announced that the company now indexes a Library of Congress equivalent every four hours. Brin highlighted how search results now returned results from Google Images and YouTube on the results page, and Schmidt said that the search latency was down. All of these should continue to draw users to its search and let the company push its other services.

Google also attempted to highlight all its other efforts, like the Chrome browser and Android. When highlighting the boom in mobile search, its execs were careful to mention the good mobile browsing experience generically, even though it largely appears to be iPhone-driven. But the company got called on its lack of clear monetization plans; after highlighting how Google Maps provided a great local ad opportunity, one analyst asked cynically why he should think there was anything new in maps, since Google had been talking about its possibility for a while now.

Even if things like Chrome don't lead to obvious revenue, however, it's clear that Google has a tight grip on its costs, and the economic chaos hasn't yet started eating into its bottom line. The company's arguments that it won't, however, are user driven, while the money itself actually comes from advertisers, who may have an entirely different view of whether bargain seekers are worth their dollars.